The bonds, the riskiest form of debt banks can sell, have been under intense pressure since mid-September when the fine for mis-selling mortgage securities in the US first emerged, stoking fears that reserves for paying AT1 coupons would fall short.

At their current level, at least two coupon skips are now being priced in, according to one investor.

Deutsche's 1.75bn 6% AT1 bond callable in 2022 was bid at 69.55 on Friday morning, below its low of 70.2 at the height of February's savage sell-off. The US$1.25bn 6.25% AT1, callable in 2020, is bid at 69.8, also an all-time low. Both notes have fallen around 14 points since September 9.

Less risk forms of Deutsche Bank's debt capital structure has been severely hit. The 750m 4.5% 2026 Tier 2 bond, where the bank cannot skip coupons, has widened by 37bp to 535bp since Thursday, according to Tradeweb. A 1.125% March 2025 senior bond has gapped 46bp wider, to swaps plus 229bp.

The bank's five-year credit default swaps, which reflect the cost of insuring against a bond defaulting, jumped by 21bp on Friday to 255bp as market fears escalated.

The sell-off followed a Bloomberg report on Thursday that a number of hedge funds that clear derivatives trades with Deutsche had withdrawn some excess cash and adjusted positions, a sign that counterparties are wary of doing business with it.

The bank was forced to deny it had sought state aid earlier this week. In a statement on Friday, Deutsche reiterated its trading clients remained largely supportive.

Unlike February, when Deutsche Bank's AT1s led the whole AT1 market lower, the rest of the sector has proved relatively resilient so far.

The Bank of America Merrill Lynch CoCo index was yielding 5.9% on Thursday, up from 5.7% in August but well inside February's high of 7.26%, according to Eikon.

The German banking sector's pain is not limited to Deutsche Bank, however. A Commerzbank Tier 2 bond shot 19bp wider on Friday morning to swaps plus 393bp, having announced on Thursday that it would cut 9,600 jobs in an business overhaul. The bond was bid as tight as 315bp earlier this month.

Norddeutsche Landesbank was forced to pull a euro seven-year senior trade on Tuesday as fears around the German banking sector took their toll. (Reporting by Alice Gledhill; editing by Alex Chambers)